As we age, many of us will need some form of long-term care, whether at home or in a facility. With nursing home costs averaging over $90,000 per year, long-term care expenses can add up quickly.
While Medicaid can help you cover these costs, it has strict eligibility requirements that may require you to spend down your assets first. If it pays out funds to recipients who are later deemed ineligible, Medicaid can place a lien against a primary residence or seek to recover money from your estate after your death.
Talk to a financial advisor to ensure your long-term care needs are met.
Fortunately, some legal tools including trusts can protect your assets from Medicare and nursing home costs. However, these tools have limitations, costs and risks to understand before moving forward.
The Long-Term Care Challenge
Long-term care is a critical service for anyone who is ill or simply needs assistance as they age. However, this care can be expensive. For example, the median annual cost of a semi-private nursing home room was over $93,000 in 2021 and it’s expected to rise to approximately $135,000 by 2033, according to Genworth. At that rate, paying for long-term care can pose a problem to many people’s financial security.
While Medicaid can pick up the tab, it strictly limits eligibility to people of limited financial means. To qualify, you must have low income and limited assets. The precise amounts are governed by state laws and vary considerably, but some allow you to have no more than $2,000 in countable resources. If you have more than the limit, you generally must use your own funds to pay for care until your assets have shrunk enough to meet the limits.
Medicaid also has a five-year lookback rule. This means you will be disqualified if you try to meet the financial limits by transferring assets to another person or other entity in the five years before you apply for Medicaid.
Protecting a $1 Million IRA From Medicaid
A number of techniques may help people with assets exceeding Medicaid’s limits protect them from the program’s eligibility rules so they can get the benefits without having to spend down their own resources first. Strategies like annuities, home equity exemptions and trusts can potentially help shield assets.
For example, say you and your spouse have $1 million in an IRA that you transferred to a trust. Doing so would potentially shield it from Medicaid, but you have to create the right kind of trust. An irrevocable Medicaid asset protection trust, for instance, would protect your IRA. However, you’d have to transfer the assets into the trust at least five years before you need Medicaid.
If you have done this correctly and outside of the five-year lookback period, the IRA will not count toward your Medicaid eligibility. Just be aware that you permanently lose control of the $1 million IRA assets.
If you transfer the IRA to a revocable living trust, you will maintain control of your assets but they’ll still count against Medicaid eligibility limits.
Talk to a financial advisor about how to use trusts and other tools.
Other Options
Besides irrevocable trusts, other options can help shield assets from Medicaid spend-down requirements and/or cover the cost of long-term care. They include:
- Long-term care insurance can cover nursing home costs without the need for Medicaid. Premiums can be costly though.
- Medicaid-compliant annuities generate income exempt from Medicaid limits, but the annuity principal is usually inaccessible.
- Life estates transfer home ownership to a spouse, excluding it from Medicaid eligibility.
- Financial gifts to family members, friends and other individuals can reduce your assets. But gifts above $17,000 per year per recipient will count against your lifetime gift and estate tax exemption, which is $12.92 million in 2023.
Limits of Asset Protection
While several strategies can shield assets from Medicaid, they aren’t perfect solutions. Here are some downsides:
- Irrevocable trusts mean permanently giving up control over assets.
- Annuities and life estates can tie up assets.
- Strategies like trusts must be enacted five years in advance of Medicaid application.
- Medicaid may still claim some home equity.
It’s also worth considering that having less wealth on paper can mean you’ll get lower-quality care. It may not be a worthwhile trade for all people in all situations. Consider speaking to a financial advisor about ways you can pay for long-term care.
Bottom Line
Protecting your $1 million IRA from potential nursing home costs involves trade-offs. In order for Medicaid to help pay long-term care costs, you must meet strict financial tests. If you have too many assets, you may have to spend your savings for care until you can meet Medicaid’s guidelines. Irrevocable trusts, life estates and Medicaid-compliant annuities can potentially shield assets from Medicaid eligibility requirements.
Retirement Planning Tips
- Working with a financial advisor can help you coordinate Medicaid planning with your overall retirement income plan. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Tracking your savings is an important component of retirement planning. Luckily, you can quickly find out whether you are roughly saving enough for retirement by using SmartAsset’s retirement calculator.
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